North America Equity Technical Analysis
US Equity Index and Treasury market technical update: Equity indexes overshoot our ideal correction targets. Now, extreme sentiment readings have us looking for stabilization
· At one point this morning, the S&P 500 Index rolling 5-day return was down more than 11%. The last time that happened was in 2011, and early 2009 before that. The sharp drop after the 2040 seven-month range breakdown overshot our ideal target zone at 1940-1944 (Chart 1). Now, having realized the median peak to trough correction of the periods we used as analogs for our 2015 outlook (1984, 1994, 2004; 9.5-15% corrections), we shift to a more constructive medium and longer term bias. While we are not looking for the longer-term bull market to resume in earnest in 2015, we do believe today’s price action is the first step in defining the lower end of the corrective range we have been forecasting since the fourth quarter of last year. Furthermore, the lopsided “risk-off” tone found in multiple global market sentiment readings argue for stabilization. Multiple global equity and commodity market measures found in the Daily Sentiment Index survey showed fewer than 10% bulls in Friday's tally (Network Press, Inc. www.trade-futures.com). Additionally, longer duration global fixed income readings came in at 85% bulls or more. October 2014 was the last time there was such a global “flight to quality” tone in those readings. An indicator we built to visualize that differential was instrumental while navigating the bullish reversal in 4Q14 (Chart 2). That indicator is based on the 10 day MA’s of those sentiment readings, and unfortunately, the speed at which the market is moving is not providing enough time for the metric to adjust to the price action. In any event, that sentiment composite is quickly trending toward oversold territory, suggesting that any subsequent weakness toward the 1867 Aug 24 intraday low or the 1820 Oct 2014 bottom is likely to be short lived and quickly reversed. Coincidentally, a full retest of the Oct 2014 low would mark a 15% correction from the 2135 May peak, the more extreme version of what we had envisioned for this year. On the upside, short-term resistance rests at the 1971 opening bear gap, 2020 violated Nov '11 weekly channel low, and most importantly, the 2040 seven month range breakdown. Look for bounces to find significant selling pressure near the latter if a rebound develops over the near term.
· The Russell 2000 Index overshot equivalent bear objectives at 1130-1135 and reversed at 1106 intraday, well above the 1040 Oct '14 trough. Old support becomes new resistance, at 1189-1211. Similarly, the Nasdaq 100 Index surpassed the 4043-4080 ideal target zone, and reversed very close to the 3700 Oct bottom (3787 intraday low). There, breakdown resistance rests at 4281-4344.
· With the flight to quality move, 10-year note yields surpassed favored resistance at the 1.99-2.01% late-Apr pattern breakdown and 1.965% Jan 61.8% retrace (Chart 3). While the late-morning backup quickly whipsawed that area, we need to see a sustained close through the 2.04% Aug 12 yield low to increase the chances that the summer rally is reversing. Next support rests at the 2.13% 200 day MA/Aug 17-Aug 18 yield lows. Medium term support includes the 2.23% Aug 19 cheap. Daily momentum has been bearishly diverging from the trend since early August, and the mid-July weekly momentum buy signal is now mature and within the typical window for a trend change. Friday’s option expiration saw the T-note dollar-weighted OI ratio mean revert ($5.26 Call/Put) However, the indicator pushed just into overbought territory with Thursday’s close. To lower yields, the 1.905% intraday rich stalled behind the 1.85% May-Jul triangle pattern objective and 1.80% Apr 3 rich.
· 10-year TIPS breakevens are another reflection of the flight to quality trend. The tightening has accelerated into late-August and has taken the spread to the 144-152bp post-crisis range lows (Chart 4). We are looking for the spread to bullishly reverse from that area, a view that is bolstered by the stretched sentiment readings and deteriorating momentum setup for the Treasury market discussed above. Per that view, we suggest entering an initial widening trade if breakevens lift through 152bp. Please see the 8/21 TIPS Breakevens Technical Update for more details.
Global FI Trade Strategies:
10-year TIPS breakevens: Enter a 50% initial widening trade if the market widens through 152bp. Use a 143bp stop.
10-year notes: Enter a pilot 25% short on weakness through 2.04%. Risk 1.90%.
Click here for the full Note and disclaimers.
Jason Hunter
(1-212) 270-0034
jason.x.hunter@jpmorgan.com
Silvia Seceleanu
(1-212) 622-1211
silvia.seceleanu@jpmorgan.com
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